Insurance is a contract between an individual or entity (the policyholder) and an insurance company (the insurer) designed to provide financial protection against various risks and uncertainties. The basic principles of insurance are the foundational concepts that guide the insurance industry and the functioning of insurance policies. These principles include:
- Principle of Utmost Good Faith (Uberrimae Fidei): Both the insurer and the policyholder are required to act in utmost good faith. This means providing accurate and complete information when applying for insurance. Failure to do so can lead to the policy being voided.
- Principle of Insurable Interest: The policyholder must have a financial interest in the insured property or individual. In other words, they must stand to suffer a financial loss if the insured event occurs. This principle ensures that insurance is not used for speculative purposes.
- Principle of Indemnity : Insurance is meant to indemnify, or compensate, the policyholder for their actual financial loss, not to provide a profit. Therefore, the insurance payout should not exceed the value of the loss suffered. This principle helps prevent moral hazard, where individuals might intentionally cause or exaggerate losses to collect insurance proceeds.
- Principle of Contribution : If the same risk is insured with multiple insurers, each insurer will contribute to the loss in proportion to the amount of insurance coverage they provide. This principle prevents over-insurance and the potential for a policyholder to profit from a loss.
- Principle of Subrogation : After settling a claim, the insurer has the right to take legal action against any third party responsible for the loss. This helps prevent policyholders from collecting insurance payouts and then pursuing the responsible party for the same loss.
- Principle of Causa Proxima (Proximate Cause) : When a loss occurs due to multiple causes, the insurance policy should consider the proximate or most direct cause of the loss. This helps determine whether the loss is covered under the policy.
- Principle of Loss Minimization : The policyholder has a duty to take reasonable steps to minimize losses when an insured event occurs. Failing to do so may result in reduced coverage or denied claims.